Address at International Banking Conference of British Bankers Association

London, 30 June 2009

Ladies and gentlemen,

I can answer the session question in one word: yes.

The real question is not ‘did we help’, but how we can go on helping to restore long-term viability to the system. What types of intervention do we now need? How do we get banks back to self-reliance?

European governments are potentially spending 16.5% of GDP on bail-outs. The European Single Market is undoubtedly affected by large distortions of the various markets involved, and this gives the European Commission every reason to be involved. We have every reason to be concerned about protecting taxpayers.

Let’s first look at the figures - the UK slice of nearly 4 trillion pounds of liabilities taken on by European Governments. According to the Bank of England, the UK financial sector is now propped up by £1.26 trillion of government support. These commitments could last until at least 2014.

The UK financial sector has accumulated losses of £250bn since the collapse of Lehman Brothers alone - far outweighing fresh capital, and including the two worst-performing banks in Europe. At the same time there is a funding gap of £800 billion pounds. That gap between loans and deposits grew four-fold since 2001… as banks such as the old HBOS pursued loan to deposit ratios of nearly 180%.

Those ratios were only possible because of wholesale funding. Now that model has failed there is no escaping that banks are anchored in the real economy. They need a strong retail deposit base and they need to lend to the creditworthy individuals and SMEs that depend utterly on bank finance.

And because banks need retail deposits, and to lend to the real economy, the European Commission needs to ensure these market are competitive. If they are not competitive many smaller banks will not have opportunities to grow, and consumers will suffer.

The massive aid received by banks such as Lloyds and RBS allows these banks to remain leaders on markets which are concentrated. For Lloyds the problems rest with their share of the retail banking market, and with RBS it is UK SME/corporate banking markets.

So the need for competitive market structures is stronger than ever; the likelihood of significant divestments by RBS and Lloyds is strong.

Let me further reflect on the RBS example for a moment.

The problems at RBS can’t be fixed overnight or by one single party.

Here we have a bank that developed a balance sheet larger than the entire UK economy, tripling in just two years from 2006. At its height, the £2.4 trillion pound balance sheet of RBS made it larger than all but the economies of the United States, Japan, Germany and China.

The bank then went on to record the largest trading loss in history, of US$60bn in one year, forcing a Government take-over in order to save it. … This is not a bank with a sustainable business approach.

It is not possible to deny the need for change in such a bank or the system that supervised it. This bank was not merely too big to fail, it was:

too big to supervise

too big to operate

too complex to understand and

highly dangerous to the European Single Market.

This adds up to a terrible argument for maintaining the status quo.

The numbers don’t lie, in the case of the RBS or the others. They make a clear case for the Commission to follow our tried and tested state aid rules.

This means restructuring must follow rescue aid. Banks cannot be rescued for ever. They need to restructure to have a sustainable business without relying explicitly or implicitly on another bail-out.

We think we added real value in approving rescue aid to banks such as Bradford and Bingley in less than 24 hours - and we think we have real value to add in the process of restructuring aided banks.

So in 2009 I wish to play a constructive role in boosting competition in banking, while also pushing for a culture change in the sector to guard against future problems.

The bottom line is that competition policy has so far been part of the solution. There is no reason to think that should change.

Restructuring banks

So far we have seen 70 banking state aid decisions across Europe. At least 27 banks have received rescue or recapitalisation aid; often this saved them from collapse.

These rescues worked because of excellent cooperation between the governments, the banks and the Commission. We must continue that way of working as restructuring takes place.

These processes are real partnerships – which only work with goodwill from all sides. But the partner dynamic does not imply these are voluntary processes; we have no realistic alternative:

If you are here today from a bank that survived without aid – I am thinking of people like Emilio Botín from Santander, who just spoke - you will rightly be wondering what the Commission is doing to safeguard your rights. You all have a right to a level playing field.

If you are a taxpayer - you will rightly be demanding that we end the situation where some banks are 'too big to fail'

If you are in the UK Government - you expect that we are not allowing other European governments to give local banks an unfair advantage against British banks

So … to entertain the idea that we don’t need a market referee, or that we don’t need the single market: that is crazy. That would be like telling a football fan that Premier League football can work without referees. Or that Chelsea and Arsenal will play only seven-a-side matches against themselves next season!

So I hope you forgive me for saying that we must get these banks off state support and maintain a competitive Single Market.

Having co-operatively agreed changes to several German banks, our attention must turn to UK banks.

I am confident we can achieve win-win situations in the UK. For me, a win-win situation means:

the banks are viable without state support

the taxpayers, my shareholders, escape a huge bill

non-aided banks are not punished because of aid given

the bank has a business model that reduces systemic risk.

So we will be working with the UK Government to achieve this.

I am not pre-judging any case, but I find it pays to be realistic in 2009. We aren't interested in cutting jobs or closing whole businesses. It is only our job to ensure that banks are in a state to survive on their own, and to ensure competition is not allowed to drain away from the UK and European banking sectors. It doesn't matter if the drain is because of oligopoly or public subsidy – it has to be stopped either way.

Wider regulatory reform

On wider regulatory reform, all competition authorities have a strong interest. Mistakes in regulation haunt us – we are often stuck dealing with problems the regulators don't see or can't fix.

I don’t deny there is a trade-off between profitability and liquidity, but liquidity must win in this new environment. It is not a co-incidence that four of the world’s eight remaining AA-rated banks are Australian. With all respect, it's not because the Australian's are super-human bankers! It's because they have more cautious and tighter regulation.

But there is another side to the story of that regulatory approach. The big four Australian banks are still highly profitable. Macro-prudential supervisions haven't stopped them serving customers and making profits; it won't stop European banks either.

Indeed, the field of payments shows us this is possible. With achievements such as SEPA, a large group of banks, competition authorities and central banks have simultaneously generated:

effective macro-prudential supervision

competition AND

profit-making services to customers.

So - I urge you all to engage with the European legislative proposals being drawn up. You need to be in the game if you want to shape the outcome.

There is no conspiracy – only the motivation that we will all sink or swim together.

Culture change

Facing that prospect, I think we must all change our ways. From kitchen-tables to board-room tables, we were addicted to double-digit returns. We wanted them without asking hard questions about how it was possible. So, I don’t believe bankers have a monopoly on failure or greed - we’re all responsible.

But bankers have a particular responsibility. Banking is more than an industry - it is also a profession. And in exchange for the freedoms we grant professions, we demand trust and high standards in return. Because some of those freedoms were abused, there must now be internal reflection and a cost.

Denial about the need for such change is not helpful. The world does not owe The City a living … so The City has to engage with this. If it does not play a part in shaping this more responsible culture, it will miss out.

The City, UK and Europe need each other

This crisis is much bigger than any of us. And it will be even worse for our grandchildren if we don't work together now to pull out of it.

What works is what matters. Defending the European Single Market and investment flows between the UK and the rest of Europe are two things that matter now. I think the City should support this out of self-interest.

The leading banks alone support more than 500,000 jobs - the changes needed to protect them will not come about by magic, or in isolation.

As everyone from Gordon Brown to Peter Mandelson to Vince Cable to Mervyn King has said … the UK needs to be part of the mainstream response and needs to address fundamental cultural issues.

So, in a world where national responses are not enough and global solution are not often possible - that leaves engagement with European legislation and European Single Market management processes at the heart of what The City needs to be thinking about.

Conclusions

In conclusion, let me say that my door is always open.

I’ve already met with two dozen bank CEOs and my starting point is a pragmatic approach to fixing this mess. Spreading and protecting the benefits of the Single Market requires sensible compromise.

But I appeal again to your self-interest. There can’t be a second bail-out. The world's largest economies are piling on roughly 9 trillion pounds of extra debt over the next three years: there is no money left for a second bailout.

So we have to move to a new market structure and we need your cooperation to build up that new environment. I hope that engagement beats complacency as Europe builds this new environment.